Jan 3 - Rising bank regulatory costs, a persistently low interest rate
environment, and weak equity valuations may force increasing numbers of private
equity (PE) firms with investments in U.S. banks to consider alternatives to
traditional exit strategies in 2013, according to Fitch Ratings.
More than four years after the onset of the financial crisis, when many PE firms
made initial investments in U.S. banks that were starved for capital, most
investors are weighing exit options carefully as their typical investment
periods of three to five years come to a close. The operating challenges faced
by many smaller banks backed by private equity, including historically low net
interest margins and higher regulatory compliance costs, have depressed
expectations for organic returns. This has led many prospective acquirers and
equity investors to mark down valuations, in many cases undermining exit
economics for PE investors looking to sell stakes in leveraged banks.
As a result, we expect more PE investors to pursue alternative investment return
strategies in 2013, including more reliance on share repurchases and special
dividends in place of IPOs and M&A transactions. To a large extent, these
changes reflect a new recognition of likely delays in the timing of exits,
driving decisions to boost near-term returns via cash distributions while
pushing ultimate exit dates further out.
Evidence of the shift in exit strategies began to emerge in 2012, when many
high-profile investment firms moved away from IPOs and M&As to pursue other cash
distribution policies or, in some cases, by extending their investment time
horizon beyond three to five years.
Washington-based Sterling Bank, minority-owned by Warburg Pincus and Thomas H.
Lee Partners, announced a special dividend that was paid out in late December.
In addition, Webster Financial completed a $100 million share repurchase in
December after the bank completed a partial IPO of its shares. After the IPO,
Warburg retained a 14% ownership stake in Webster.
Absent a robust turnaround in U.S. bank fundamentals in 2013, we expect more
institutions with PE backing to evaluate alternative exit scenarios more
carefully this year. A revival of the IPO market and a pick up in bank M&A could
ease pressure on PE firms to consider exit alternatives, but many investors in
banks will likely be forced to look away from traditional exit routes and push
out return horizons as industry profitability remains under pressure.